Productivity & industrial strategy
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Economic growth

Decoupling of Wage Growth and Productivity Growth? Myth and Reality

John Van Reenen
John Van Reenen
João Paulo Pessoa
João Paulo Pessoa

A closer look at the decoupling of wage growth and productivity growth: Pessoa and Van Reenen distinguish between ‘gross’ and ‘net’ decoupling and examine the trends of both in the US and the UK.

This report forms part of the Resolution Foundation’s work for its Commission on Living Standards. Visit the Commission’s website www.livingstandards.org to find out where you stand on the income distribution.

Key findings

  • It is widely believed that in the US wage growth has fallen massively behind productivity growth. Recently, it has also been suggested that the UK is starting to follow the same path. Analysts point to the much faster growth of GDP per hour than median wages. We distinguish between “net decoupling” – the difference in growth of GDP per hour deflated by the GDP deflator and average compensation deflated by the same index ‐ and “gross decoupling” – the difference in growth of GDP per hour deflated by the GDP deflator and median wages deflated by a measure of consumer price inflation (CPI). Basic economics would predict that real compensation growth deflated by the produce price (the labour costs that employers face) should follow real labour productivity growth (value added per hour), so net decoupling should only occur if labour’s share falls as a proportion of gross GDP, something that rarely happens over sustained periods. So net decoupling would be a real surprise.
  • The report shows that over the past 40 years that there is almost no net decoupling, although there is evidence of substantial gross decoupling in the US and, to a lesser extent, the UK. This difference can be accounted for essentially by three factors (i) wage inequality (which means the average wage is growing faster than the median wage), (ii) “benefits” ‐ the wedge between compensation (which includes employer‐provided benefits like pensions and health insurance) and wages which do not and (iii) differences in the GDP deflator and the CPI deflator (i.e. producer wages and consumption wages). These three factors explain basically ALL of the gross decoupling leaving only a small amount of “net decoupling”. The first two factors are important in both countries, whereas the difference in price deflators is only important in the US.
  • The report also looks at the share of labour in national income as a cross check. These trends are consistent with our analysis. Labour’s share has fallen only slightly as a share of GDP in the US and UK. Interestingly, there is more of a fall in this “functional” share of income in Continental EU nations and Japan, so there might be evidence of capitalists doing a lot better than workers in these nations whereas the latter group have done a lot better in the US and UK.

Further reading

Getting the green light
The path to a fair transition for the transport sector
·
Adam Corlett, Zachary Leather, Jonathan Marshall
EU-turn
Resetting the UK-EU relationship through strategic dynamic alignment
·
Sophie Hale
The growth mindset
Sizing up the Government’s growth agenda
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Emily Fry, Greg Thwaites
John Van Reenen
John Van Reenen
João Paulo Pessoa
João Paulo Pessoa